Return Predictability, Expectations, and Investment: Experimental Evidence

Marianne Andries, Milo Bianchi, Karen Huynh and Sébastien Pouget
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Milo Bianchi: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Karen Huynh: AMUNDI Asset Management
Sébastien Pouget: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: In an investment experiment, we show variations in information affect belief and decision behaviors within the information-beliefs-decisions chain. Subjects observe the time series of a risky asset and a signal that, in random rounds, helps predict returns. When they perceive the signal as useless, subjects form extrapolative forecasts, and their investment decisions underreact to their beliefs. When they perceive the signal as predictive, the same subjects rationally use it in their forecasts, they no longer extrapolate, and they rely significantly more on their forecasts when making risk allocations. Analyzing investments without observing forecasts and information sets leads to erroneous interpretations.

Keywords: Return Predictability; Expectations; Long-Term Investment; Extrapolation; Model Uncertainty. (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-fmk
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Published in Review of Financial Studies, 2024, pp.1-39

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Related works:
Working Paper: Return Predictability, Expectations, and Investment: Experimental Evidence (2024)
Working Paper: Return Predictability, Expectations, and Investment: Experimental Evidence (2024)
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